Fund Investing

October was a very good month for mutual funds in Canada. All but one of the 44 Morningstar Canada Fund Indices, which measure the aggregate returns of funds in various standard categories, posted gains during the month, with a majority of the indices gaining between 2% and 4%. Nine indices increasing by more than 4%, according to preliminary performance numbers released today by Morningstar Canada.

About the Author

Christian Charest is the editor responsible for Web sites at Morningstar Canada. He has been in the investment industry since 1995, having previously worked for Laurentian Bank and Merrill Lynch Canada. He holds a BBA in finance from the École des Hautes Études Commerciales in Montreal.

The Canadian dollar depreciated significantly versus many world currencies, dropping approximately 2% against both the euro and the UK pound, and more than 3% against the U.S. dollar and most major Asian currencies. This added to the performance of foreign equity and fixed-income funds, which already benefited from strong market returns during the month.

The best-performing fund index for the month was the one that tracks the Asia Pacific Equity category, which gained 7.7%. Along with the currency effect, funds in this category benefited from strong gains by Japanese stocks, with the Nikkei 225 Index gaining 8.1% for the month when measured in local currency. South Korean stocks, which on average account for 10.7% of fund assets in this category, were also a major contributor, with the KOSPI Composite Index gaining 5.4% and the South Korean currency appreciating by 5.9% against the loonie.

The fund index that tracks the Asia Pacific ex-Japan Equity category was the second-best performer in October with a 7.1% gain. Funds in this category typically hold a majority of their assets in stocks from South Korea and Greater China; indexes tracking the Shanghai, Hong Kong, and Taiwan stock markets were up 1.3%, 2.5%, and 4.5%, respectively, for the month. The Morningstar Greater China Equity Fund Index was the third-best performer with a 6.6% gain, while the Morningstar Emerging Markets Equity Fund Index was fourth with a 5.4% gain.

The Morningstar U.S. Equity Fund Index was up 4.7% for the month, ranking fifth overall. This performance reflected a 2.3% total return for the S&P 500 Index and a 3.3% appreciation of the U.S. dollar against its Canadian counterpart. The fund index tracking the U.S. Small/Mid Cap Equity category was up 3.4%.

Canadian stocks had a solid month in October, as the S&P/TSX Composite Index broke through the 16,000 mark for the first time and ended the month with a 2.7% total return. However, without the benefit of currency effects, funds that invest in domestic equities underperformed their foreign peers. The Morningstar Canadian Equity Fund Index surpassed the benchmark with a 2.9% increase for the month, while the Canadian Focused Small/Mid Cap Equity Fund Index gained 3.1%. The other three domestic equity fund categories—Canadian Dividend & Income Equity, Canadian Focused Equity, and Canadian Small/Mid Cap Equity—all increased 2.7%.

The worst-performing equity fund indices were all sector-fund trackers. The worst overall, and the only fund index to post a negative result in October, was Precious Metals Equity, which decreased 2.2%. Also near the bottom, Energy Equity was up 1.4%, while Real Estate Equity, Global Infrastructure Equity and Natural Resources Equity all gained 2.4%.

Morningstar Canada's preliminary fund performance figures are based on change in funds' net asset values per share during the month, and do not necessarily include end-of-month income distributions. Final performance figures will be published on www.morningstar.ca next week.

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